SAC’s Cohen Risks Losing Fortune While Keeping Freedom

SAC Captial Advisors founder Steven Cohen wasn't named in the criminal indictment, and faces no threat of time in a federal prison. Photographer: Scott Eells/Bloomberg

July 26 (Bloomberg) -- Steven A. Cohen, founder of a $14
billion hedge fund indicted in what the U.S. calls an
unprecedented insider trading scheme, faces a future without a
fund or a multibillion-dollar fortune. On the other hand, he
won’t be behind bars.

The U.S. wants to recover hundreds of millions of dollars
from Cohen’s fund, SAC Capital Advisors LP, representing the
money it made from its alleged illegal trading, and may try to
get billions more from Cohen and the company.

Cohen himself wasn’t charged, unlike at least eight former
SAC fund managers and analysts who have faced or are facing
fraud charges for their roles in a scheme which allegedly
involved more than 20 companies and went back as far as 1999.

The government has also filed civil money-laundering
charges against the firm, which call for fines and penalties to
be determined at a trial, the date of which hasn’t been set.
Those civil charges pose the greatest threat to Cohen’s fortune
because prosecutors allege that if the fund reinvested the
proceeds of illegal insider trading into its capital pool, then
the entire pool is tainted and subject to forfeiture.

“Forfeiture, restitution and fines are the real worry
for SAC,” said John J. Carney, a former federal securities
fraud prosecutor and SEC attorney now at Baker Hostetler LLP.
“If the government can establish the alleged fraudulent profits
with precision, then they may have the ability to wipe out the
firm’s net capital, making bankruptcy or a receivership a real
threat.”

Commingling Profits

In its civil suit, the U.S. alleges that SAC engaged in
money laundering, “commingling the illegal profits from insider
trading with other assets, using the profits to promote
additional insider trading.”

The government also filed criminal charges against SAC,
allowing it to seek forfeiture of ill-gotten gains obtained as a
result of the crime, if the firm is convicted.

That might allow the government to make a sizable dent in
Cohen’s own wealth: with $9 billion, he’s ranked 121st among the
world’s billionaires, data compiled by Bloomberg show.

Citing laws that say it has the right to seek the
forfeiture of any property involved in money laundering
transactions, the government says it is seeking “any and all
assets” of SAC Capital Advisors LP, SAC Capital Advisors LLC,
CR Intrinsic Investors LLC, Sigma Capital Management LLC, and
more than 20 other affiliated investment funds, according to the
complaint.

Ruinous Restitution

Michael Shapiro, the co-chair of the white-collar defense
practice at Carter Ledyard & Milburn in New York, said a
conviction of SAC may lead to “enormous fines and potentially
ruinous amounts of restitution” from the firm.

Prosecutors may seek billions of dollars from Cohen’s
personal fortune by claiming in the criminal case and their
civil forfeiture lawsuit that he “co-mingled” illegal profits
from insider trading with other assets he legitimately earned,
Shapiro said.

“His house, his art -- they can go after that,” Shapiro
said.

Cohen is one of the world’s biggest art collectors, with
works by Van Gogh, Manet, de Kooning, Picasso, Cezanne, Warhol,
Johns and Richter.

Determining whether Cohen’s own assets include proceeds of
SAC’s insider trading will be “a battle for the forensic
accountants” that may take years, said Jacob Frenkel, a former
SEC lawyer now with Shulman Rogers Gandal Pordy & Ecker PA in
Potomac, Maryland.

Bharara Success

The government has presented a case that it’s likely to
win, given the success rate Manhattan U.S. Attorney Preet
Bharara’s office has had against insider traders. The office has
won convictions at trial or in guilty pleas in 100 percent of
the cases brought. That could herald the demise of Cohen’s fund,
which has about $13.9 billion under management, of which about
$7.5 billion is part of Cohen’s own $9 billion fortune.

“This is effectively a death knell” for SAC, Carney said.
“Clearly, the Justice Department must have made the
determination that there were so many corrupt employees that
they outweighed the other honest employees.”

It's not the first time Bharara has sought charges against
a business. In February 2012, his office charged Wegelin & Co.,
Switzerland’s oldest private bank, for helping U.S. taxpayers
hide assets from the Internal Revenue Service. Wegelin pleaded
guilty and was ordered to pay almost $58 million.

While he declined to comment on the possibility of charges
against Cohen, Bharara said the investigation was “ongoing,”
and that the government isn’t “restraining” SAC assets.

“I’m not going to say what tomorrow may or may not
bring,” he said.

No Coincidence

“When so many people from a single hedge fund have engaged
in insider trading, it is not a coincidence,” Bharara said.
“Today’s indictment is not just a narrative of names and
numbers, it is more broadly an account of a firm with zero
tolerance for low returns but seemingly tremendous tolerance for
questionable conduct,” he said. “So SAC, over time, became a
veritable magnet for market cheaters.”

Some SAC investors have already indicated they want to take
their money out. SAC may shed investors who lose confidence in
the well-performing firm or the government may shut it down
after a conviction or lawsuit loss or a settlement. Diehards may
stay giving Cohen enough capital to continue, unless the
government ends his hedge fund career.

Deutsche Bank

Banks including Deutsche Bank AG and Goldman Sachs Group
Inc. were debating whether to suspend doing business with SAC,
which has been one of Wall Street’s biggest trading clients,
according to two people briefed on the matter. Spokespeople for
the biggest Wall Street banks declined to comment on whether
they had come to a decision.

Institutional investors have already redeemed their
money in the fund. Some SAC clients will probably keep their
money where it is, said Don Steinbrugge, managing partner
of Agecroft Partners LLC, a Richmond, Virginia-based firm that
advises hedge funds and investors.

“Each new allegation from the SEC will cause some
investors to withdraw, however, there will be investors that
stay with Steve Cohen to the bitter end,” he said. “Those
investors who stay with Cohen have built strong loyalty toward
him over time and also don’t see much downside.”

Assets Managed

SAC oversaw $6 billion for outsiders at the start of this
year. Cohen has about $7.5 billion in SAC’s funds and employees
account for $1.5 billion of assets, according to data compiled
by Bloomberg.

Cohen, 57, wasn't named in the criminal indictment, and
faces no threat of time in a federal prison.

Bharara has said he’s not aiming to put the firm out of
business but that federal laws allow for monetary penalties for
companies that break the law. SAC was charged with four counts
of securities fraud and one count of wire fraud.

“This is a case about corporate conduct and corporate
responsibility,” Federal Bureau of Investigation Assistant
Director George Venizelos said in a statement. “SAC Capital and
its management fostered a culture of permissiveness. SAC not
only tolerated cheating, it encouraged it. Our aim all along has
been to root out the wrongdoers, and send a message to anyone
else inclined to break the law. If your information ’edge’ is
inside information, you can’t trade on it.”

An initial hearing in the case is scheduled for today
before U.S. District Judge Laura Taylor Swain in Manhattan.

The case is U.S. v. SAC Capital Advisors LP, 13-00541, U.S.
District Court for the Southern District of New York
(Manhattan).